The Consequences Of Reduced Federal Transportation Investment

6 Executive Summary that depend on the federal government for a substantial percentage of their highway spending. These may be the states with the most to lose from a diminished federal program. Cuts in transit funding could be particularly far-reaching, potentially affecting operations for agencies of all sizes. Environmental, energy and safety goals would not be as likely to suffer under a reduced federal program, at least in the short term. This is not to say that progress in these areas is immune from federal budget cuts, but the calculation has to take into account some perverse effects, such as the environmental benefits of crowded transit vehicles and the safety benefits of slower traffic speeds. It is important to recognize, however, that the fact that these perverse effects exist in the first place is in large part because the federal program under SAFETEA-LU was not performance based, and even MAP-21 scarcely targets environmental or energy performance goals at all. The most striking aspect of our analysis is that, while some states might be able to increase revenues in order to compensate for as much as half of lost federal highway funding, it is much less likely that transit agencies will be able to replace a large portion of lost federal transit funding. Raising additional highway funds at the state level is not trivial, but it is more likely because a number of user-fee mechanisms, such as gas taxes and tolls, are typically already in place. If the political will exists, these mechanisms can be used to generate more funds. By contrast, transit fares at any level rarely cover the cost of operations and the transit industry is unlikely to be able to use fare increases to substitute for a shortfall in funds available for capital expenditures. The alternative – raising transit revenues through broad-based taxes or higher fees on auto drivers – can be politically very challenging, to say the least. Reduced funding for transit nationally has substantial consequences in terms of achieving our national transportation goals. It also has serious consequences for the places where the vast majority of Americans live (over 80 percent live in metropolitan regions), and for some of the most disadvantaged populations in America, many of which are concentrated in these large metropolitan areas. Based in part on these likely consequences, and on the previous work of NTPP, we also propose four policy recommendations. These are summarized on the next page.

The Consequences of Reduced Federal Transportation Investment Summary of Policy Recommendations Based on the analysis in this and previous BPC reports, we recommend that Congress consider the following actions: 1) Expand federal revenues while providing a framework for increased state and local investment. Continued underinvestment in our nation’s transportation system will have substantial detrimental impacts in areas of national interest, for which the federal government should take responsibility. The short-term solution is the politically challenging but logistically simple action of increasing the federal gas tax. However, regardless of whether that can be achieved, Congress must provide states and metropolitan areas with better financing tools and assistance with their efforts to raise revenue. 2) If expenditures must be cut, programmatic reform is even more essential. When resources are severely constrained, the argument for undertaking greater programmatic reforms to better focus transportation spending on national goals becomes more, not less, compelling. Our report shows that without more programmatic reform, the consequences of cutting federal transportation funding could have substantial negative consequences. 3) Programmatic reform should include competitive grant programs. Competitive discretionary grant programs, particularly for clear national priorities such as freight and goods movement, allow for a bottom-up approach that encourages innovation while still providing states with substantial flexibility and control over how they achieve national goals. 4) Metropolitan transportation should have a prominent role in federal legislation. The report finds that a diminished federal role in transit programs could potentially be damaging to the nation’s economic growth. BPC has long advocated a “mode-neutral” approach where the federal government gives flexibility for grantees with respect to mode choice, but demands accountability with respect to outcomes. 7

Energy & Infrastructure Program National Transportation Policy Project

The Consequences of Reduced Federal Transportation Investment The Consequences of Reduced Federal Transportation Investment Where We Are Today Until recently, U.S. transportation policy was defined by growth – driving increased (more vehicle miles were traveled), system capacity expanded (through the creation of the Interstate Highway System and new transit lines), and federal funding grew (with rising gas tax contributions). This growth not only allowed for sustained investment levels and longterm funding commitments, it also provided the basis for a political consensus on transportation funding that enabled many highway bills to pass through Congress with the support of large bipartisan majorities. As federal transportation funding increased, the federal role in transportation policy and investment also grew. The result was a steady broadening of the federal transportation program, along with a steady broadening of the range of its beneficiaries. That growth paradigm now appears to be over, temporarily if not permanently. Vehicle miles traveled (VMT) peaked in 2007, prior to the recession, and VMT per capita is at approximately the same level now as it was in 2000.1 The Interstate Highway System is complete, and it has become increasingly challenging to construct new capacity in a developed environment. In addition, gas tax revenues have leveled off thanks to flat or declining VMT, improvements in vehicle fuel efficiency, and the stagnation in real terms of the fuel tax, which has stayed at 18.4 cents per gallon without any adjustment for inflation since 1993. Declining revenues have thrown federal transportation policy into a tailspin. There is little appetite for raising the fuel tax, but also little incentive for Congress to cut funding. The federal highway program continues to operate without long-term funding sustainability. The enactment of Moving Ahead for Progress in the 21st Century (MAP-21) was made possible by an additional infusion of almost 20 billion in general fund revenues. Before that, the Highway Trust Fund (HTF) had already been bailed out with approximately 35 billion in general fund revenues. Almost certainly, Congress will be forced to confront this issue once more, as soon as 2014, when the HTF will again face insolvency. If Congress is eventually able to confront this fundamental funding issue, it may be that cutting the program is easier than increasing revenues or continuing to borrow money to fund it. Without additional funds, any new bill that limits federal transportation funding to current gas tax revenues would compel a reduction in federal resources of at least 35 percent. In order to put together a sustainable long-term federal transportation program, Congress will most likely have to choose between raising additional revenues and cutting spending. All of this is happening in the context of a growing sense of crisis about the U.S. government’s annual budget deficits and long-term debt. There is broad agreement that the nation is on a dangerous and ultimately unsustainable fiscal trajectory as federal spending continues to consume an ever-larger portion of Gross Domestic Product (GDP). The U.S. public debt now exceeds 10 trillion2 and Congress has not yet proved equal to the politically difficult task of addressing the long-term structural issues that have created it. Fair or not, this means it will be extremely difficult, if not impossible, to increase federal spending on transportation as has been done in the past. Elected officials are showing reluctance to increase deficit spending or raise taxes to pay for programs, no matter how important or economically justified they might be. Overall, transportation is likely to face cuts, or stagnant funding levels, in the foreseeable future. Defining the Federal Role The Bipartisan Policy Center’s (BPC’s) National Transportation Policy Project (NTPP) has consistently made the case that no matter how much the federal government spends on surface transportation, that spending should be focused on national goals and outcomes.2 We have defined the national goals and performance measures that we believe to be appropriate for a federal surface transportation program. We have also 9

10 The Consequences of Reduced Federal Transportation Investment suggested a consolidated and reformed federal program structure to ensure that remaining funds are used with maximum effectiveness in the pursuit of national priorities. The federal role in transportation is defined by two components – outcomes and eligibility. Outcomes are the national goals the federal government intends to advance through its transportation investments and programs, along with the performance measures it uses to track progress. These do not yet exist in federal law, but are central to the performancebased approach that BPC has proposed. Eligibility defines where federal funds can be used and is extensively addressed in federal law. The kinds of projects and programs that are eligible for federal transportation funding have grown increasingly broad over the last several decades. This has led to a more diffuse definition of the federal role. In previous reports, BPC has proposed maintaining broad eligibility for discretionary grant programs that should be focused on system expansion, but we have also stressed the importance of better defining eligibility for formula programs that should be focused on system preservation. Congress has made some progress toward defining the federal role in transportation, thanks to the adoption of MAP-21, which articulates a number of specific national goals. But formulating national goals, while a worthwhile and essential first step, is not the same as clarifying the federal role. MAP-21 does not define exactly what the federal responsibilities are as compared to state and local ones, nor does it tie the specified national goals to performance measures or funding. If Congress were to cut and consolidate the federal program in a way that focuses existing federal resources on specific national goals, that would be very different from a simple across-the-board cut. However, given the continued lack of productive conversation on the federal role, and continuing constraints on federal funding, we could be headed for exactly the latter, simpler scenario. Policy Recommendations MAP-21 will expire on September 30 2014, which means that Congress should begin working on the next surface transportation authorization bill in 2013. Since 2007, NTPP has conducted extensive research and produced several reports providing both a long-term vision for the future of surface transportation, and specific recommendations for this reauthorization. Based on the analysis in this and previous BPC reports, we recommend that Congress consider the following actions: 1) Expand federal revenues while also providing a framework for increased state and local investment. This report further underscores the point that continued underinvestment in our nation’s transportation system will have substantial detrimental impacts in areas of national interest and importance, for which the federal government should take responsibility. Numerous reports from other transportation stakeholders have detailed some of these consequences, but the usual stakeholders are not issuing this report. We are a group of former elected officials, transportation experts and business executives who have consistently emphasized the need for programmatic reform, regardless of how much money is being spent. But we also believe that diminished federal investment will have serious consequences for the important goals we have outlined. The fiscally and economically responsible thing to do is to increase the fuel tax to cover existing and expected federal transportation investment needs, and to index the tax to an appropriate indicator of need in order to prevent the further and continuing erosion of federal resources. However, increased federal investment is only part of the need – the federal government also needs to better assist states in developing their own revenue sources. For one, the ban on tolling the interstate highway system remains a substantial barrier to revenue-raising efforts by states and metropolitan areas. For another, the federal government could play a leadership

The Consequences of Reduced Federal Transportation Investment MAP-21 will expire on September 30 2014, which means that Congress should begin working on the next surface transportation authorization bill in 2013. role in assisting states that are interested in exploring new funding mechanisms, such as tolling or VMT fees. 2) If expenditures must be cut, programmatic reform is even more essential. BPC recognizes that we are in an era of fiscal austerity, where a fuel tax increase is unlikely and there is strong opposition to additional deficit expenditures. However, this should not be used as an excuse to falter in our efforts to advance national transportation goals or consider the appropriate federal role. In fact, the current budget situation creates opportunities as well as challenges. When resources are severely constrained, the argument for undertaking programmatic reforms to better focus transportation spending on national goals becomes more, not less, compelling. We believe the worst possible scenario would be if Congress simply reauthorizes the existing program at lower levels of funding without serious reforms. Unfortunately, this is also the path of least resistance in many ways. Our national interest in having a strong, safe and efficient transportation system demands that Congress either raise additional revenues or reform the federal program. Ideally, Congress would do both. 3) Programmatic reform should include competitive grant programs. One of the key takeaways from our analysis is that much of the reason federal funding cuts would be so damaging to national goals is that so much federal funding is allocated by formula. States faced with a loss of federal funds are likely to use their remaining funds, including any additional funds they raise, to address their most immediate priorities. These priorities may or may not coincide with national goals. But if federal grant money were available on a competitive basis, states and metropolitan regions would want to compete for it regardless of the size of the federal program. This would enable the federal government to support projects or programs that advance national goals regardless of the size of the federal pie. Formula programs with large flexibility – which is what we have now – provide little assurance that scarce federal funds will be spent in accordance with national goals. Competitive discretionary grant programs, particularly for clear national priorities such as freight and goods movement, should be an essential component of any federal program. They allow for a bottomup approach that encourages innovation while still providing states with substantial flexibility and control over how they achieve national goals. Implemented using a transparent process that includes both the legislative and executive branches, such grants can be the most powerful component of the federal transportation program. 4) Metropolitan transportation should have a prominent role in federal legislation. The role of metropolitan regions in federal transportation policy continues to be called into question, most recently when the U.S. House of Representatives proposed eliminating dedicated funding for mass transit. Senators from “rural” states have been resistant to metropolitan transit programs because they perceive them as hostile to rural interests. It is time we moved beyond these simplistic debates to a more honest and meaningful discussion about the role of the federal government in transportation generally, and metropolitan transportation specifically. This report indicates that a diminished federal role in transit programs could potentially be damaging to the nation’s economic growth. BPC has long advocated a “mode-neutral” approach where the federal government gives flexibility for grantees with respect to mode choice, but demands accountability with respect to outcomes. This approach can help us move beyond the issue of dedicated funding for mass transit, as all modes would be equal. Similarly, there is no reason we cannot adequately fund rural transportation needs while also supporting metropolitan transportation. False distinctions between different transportation modes and between the interests of different regions should not be allowed to divide us and thwart progress toward the achievement of national goals. 11

12 The Consequences of Reduced Federal Transportation Investment Warnings that the United States is under-investing in infrastructure, including transportation, have been sounded for decades despite continuous growth in overall funding levels. Understanding the Consequences It will be very challenging for Congress to implement the recommendations listed above, particularly with respect to raising additional revenues. Recognizing this reality in our most recent report, Performance Driven: Achieving Wiser Investment in Transportation, we outlined a federal transportation program that could be implemented assuming a 35 percent cut in federal funding (sufficient to bring spending in line with current revenues to the HTF). We

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